ABSTRACT

In this research, we study the impact of the COVID-19 on transition of the business model of indoor play centers in the United States from traditional and in-person to digital platforms and e-commerce. With strong dependency on creating hedonic experiences for their customers, indoor play centers are considered as an unlikely candidate for such transformation. With changes necessitated by the pandemic, this unlikely transition has been catalyzed. In our study, we build on a mixed design that follows two phases in order to explore and identify the process of transformation. We build on a three-step process of exploratory and semi-structured interviews to identify emerging themes. Our findings are then used to guide our qualitative analysis of content available in a closed forum as posts, exchanges and comments by owners and operators of indoor play centers. Our findings reveal a link between strategic disposition of business operators and contextual perception in determining the likelihood of digitalization of operations and product and service offerings. We also find that the process of digitalization follows a four-step model of Recognition, Realization, Reconfiguration, and Adaptation, as businesses in this industry segment define and design their operations.

Keywords: COVID-19, Indoor Play Centers, Hedonic Experience, Digitalization Process

1. Introduction

It is difficult to deny that he COVID-19 pandemic had a widespread economic impact worldwide, and that it has affected the shape of business on a global scale (Bhatti et al., 2020). The impact, however, did not affect all business sectors equally. Evidence shows that despite governmental support in form of loans and grants, many small businesses were forced to shut down or undertake layoffs and furloughs for their staff (Bartik, Bertrand, Culeen, Glaeser, Luca, & Stanton, 2020). Many business sectors were able to navigate a transition to remote operations. For businesses that relied on the hedonic shopping experience, this transition took place more slowly as they ramped up their presence in the e-commerce arena. Businesses with primarily e-commerce concepts-such as Amazon- and those with strong setups already developed-such as Walmart- experienced unprecedented growth in a short timeframe. However, certain business sectors were more constrained in their ability to transition to e-commerce. For instance, the indoor entertainment and play centers struggled to adapt to the new circumstances, primarily due to the fact that their most central product required an absolute face-to-face service delivery with physical presence from their customers.

Our research focuses on initiatives taken by small business owners in the area of indoor play and entertainment for children, to deliver services through e-commerce platforms. Unlike many other business sectors, indoor play centers rely on digital platforms only to sell tickets for visits, or to communicate promotional material to their customers. It was only after it became apparent that the pandemic will last for longer than initially expected that owners of indoor play centers considered e-commerce alternatives more seriously. Since the beginning of the pandemic, we have observed and recorded communications by owners of indoor play centers and have categorized and coded their various initiatives to stay afloat. Unlike many other businesses, these e-commerce initiatives are primarily seen as a way to bridge the period during pandemic to allow for these business owners to emerge on the other side once the pandemic is over.

2. Product Digitization

Product digitization has been trending with the prevalence of internet during the past three decades. Past research has suggested that digital information technologies will play an increasingly prominent role in business landscape, with characterized by intensity of product and services information, and reliance of value chains on digital technologies (Porter & Miller, 1985). Product and service dimensions such as information content (Porter & Miller, 1985) and nature of the product or service (Seetharaman, 2020) have been considered as attributes that further fast-track the process of transformation to digital business models or the push toward e-commerce. Many physical products and services have gradually adopted technology to transform themselves into electronic versions. During the early stages of emergence of e-commerce, digital platforms were made available as an alternative platform for payment and transactions where customers would purchase physical products or tangible services without the need for in-person presence in location at the time the transaction took place. In those stages, e-commerce appeared as little more than an advancement to the previously state-of-the-art telecommerce where purchase transactions were facilitated using telephones.

Early benefits of digital platforms included cost reduction, increased volume of customers, speed in transactions, and customer convenience. Over time, e-commerce has evolved to offer opportunities where digital versions of traditional products or services could become available. Products or services with the capacity to carry more intense product information allowed customers to utilize that information to make decisions in the process of selection or purchase of products and services (Sabherwal & Vijayasarathy, 1994). For instance, electronic books, virtual meetings, and streaming of media have become an integral part of daily life and business activities. With technology providing the necessary support, many areas of business and industry have continued to experience digitization and transition to e-commerce, or at least to include these aspects as a more central component to their business models.

3. COVID-19 and Digitization of Business

With the COVID-19 pandemic emerging, many aspects of social life and business were severely affected. To control the spread of the infection in order to protect human lives, many countries imposed stringent restrictions on social gatherings. In several countries, particularly in Europe, restrictions went so far to include commuting for non-essential purposes.  In addition to restrictions, social concerns about health and safety resulted in individuals looking way to purchase daily necessities, without having to risk their health through increased interactions with others. Although restrictions were enforced in many parts of the world, many countries allowed for products or services that assessed as essential to continue being manufactured or delivered due to the important role that they played in people’s daily lives (Seetharaman, 2020). The combination of restrictions and social preferences resulted in setup of a context highly favoring less interpersonal online transactions.

While industries with concepts requiring in-person hedonic experiences, such as travel, tourism, and entertainment, were severely impacted as the result of the pandemic, some others such as online retail and cloud-based services thrived. The consequence was an exponential growth in market share and size of business in those industries with high focus on digital products or services. On the other hand, industries with business models highly depending on in-person service or experience, such as restaurants and indoor entertainment, adopted aspects of going digital that fit with their core value propositions. Although many business and industry segments took steps in order to redefine their processes and to accommodate the emphasized need to limit in-person interactions, not all of them managed to do so as effectively (Seetharaman, 2020). Restaurants that transitioned to delivery-only services observed diminished profit margins resulting from widespread prohibitions and enforced restrictions which substantially reduced demand for their services, leading to a large number of closures in that industry (Mohammed, 2020). Similarly, those industry segments such as tourism and indoor entertainment which fundamentally depended on physical presence of customers found the transition to be more challenging than others. Many business and industry segments that were less impacted by closures were forced to deal with challenges resulting from disruption in routes of transportation, increased import and export regulations, resulting in widespread shortages in inventory (Uhler, 2020). Many of these shortages were also a direct consequence of hindered production due to difficulties of businesses in offering adequate protection for their employees (Hailu, 2020; Gallagher & Kirkland, 2020).

Although the spread of the coronavirus in the United States was rapid and widespread, it did not follow a homogenous pattern. Consequently, businesses on the later cycle of the spread were able to observe ongoing developments in the other parts of the country and were given time to successfully understand the new ecosystem or order to develop dynamic capabilities that allow them to adapt to the contextual shifts and changes (Tronvoll et al., 2020). While most businesses often have to rely on their own past experiences to develop dynamic capabilities (Seifzadeh, 2012), observing changes ahead of time could allow them to recognize the need to shift their business models without the need to go through costly trial and error processes (Kiani et al., 2019). This, however, was not without challenge even for business models that were specifically designed for offering products and services through online platforms. With the rush of customers to make purchases of products and services through online and digital platforms (Abiad et al., 2020), especially the younger population (Shi et al., 2020), many nascent e-commerce platforms experienced challenges to accommodate the surge in demand, in some cases leading their portals to fall significantly behind their designated timeframes, or even inaccessible altogether (Gray, 2020; Debter, 2020).

4. Indoor Play Centers and COVID-19

During the COVID-19 pandemic, indoor play centers were among the first businesses to cease operations. Due to the perceived risk of transmission of infection, local and regional health agencies in those areas on the earliest cycle of infection enforced mandatory closures. For instance, in the state of New York, following March 15^th, 2020 all indoor play centers were instructed to close down for at least two weeks. The two-week period was renewed for one more month at the beginning of April 2020.

Indoor play centers operate on a seasonal model. In areas with colder climates, revenues are primarily generated during the cold months of the year and up to 80 percent of revenues are generated during 6 months from November to April when outdoor alternatives are not available. During the high season for the industry, indoor play centers experience spikes in sales during Winter and Spring breaks, when school-age children are off from school. Each school break accounts for up to 15 percent of annual revenues. In warmer climates, the seasonality of the business model may be reversed, with warmer months of the year being high season and the cooler months resulting in lower revenues.

 Most indoor play centers have three categories of operations which include open play, café/food, and birthday event hosting. Open play admission may be sold to foot traffic, or be available to subscribing members. Birthday events are often booked in advance with a deposit.

5. The Study

The aim of this study is to understand the stages the role that the COVID-19 pandemic has played in further digitalization of the business model and operations in the indoor play center industry. Due to the hedonic nature of the experience that is associated with this specific industry segment, it is an unlikely suspect in undertaking such transformation successfully. However, given the uniqueness of circumstances imposed as the result of the 2020 pandemic, continuation of the previous business model has been a failing challenge. Our observations and experiences in this field show that while reasonable skepticism exists over whether such transformation is possible, many businesses in this industry segment have indeed taken considerable steps toward digitalization. Therefore, exploring the process of this unlikely transformation can provide us with a new window into our understanding of the digitalization process.

Most studies that focus on the topic digitalization and digital transformation overlook industry-specific factors that can set an industry segment as a likely or unlikely candidate in the process (Unruh and Kiron, 2017; Rachinger, Rauter, Muller, Vorraber, and Schirgi, 2018). Therefore, their propositions of the process of digitalization have potential for improvement in external validity. In our study, with a focus on the specific industry of indoor play centers, we seek to contribute to the literature by exploring and understanding the paths and processes that underly the transition from a very traditional business model that depends only on in-person transactions to ones that is more adoptive of e-commerce practices.

6. Sample and Methodology

We conduct a qualitative analysis of a sample that includes of small business owners and operators in the area of indoor play and party services. The platform is a party center community in Facebook which is established and owned by one of the leading providers of party center management software for indoor play centers. The community was created and promoted immediately after the COVID-19 pandemic emerged as and as a resource to help business owners share ideas and discuss alternatives to help their businesses survive. Membership in the community is by invitation only, and access to its content and material is restricted to the party center owners and operators that are subscribers to the services of the platform owner. There are 818 businesses located in the United States and Canada that are members of this closed and exclusive community.

To address the research question in our study, our approach was to collect qualitative data through two phases. During the first phase, we collected data from business owners and operators of indoor play centers with the aim to develop a deeper and clearer understanding of the impact of the COVID-19 pandemic on their industry segment and their efforts in the area of digitalization. In the second phase, we conducted systematic review of correspondences, comments, exchanges, and posts left by members of a closed group of owners and managers of indoor play centers. Qualitative data allows us to conduct a better in-depth understanding of the phenomenon that we are interested in and to explore a more robust answer to our research question (Sheth and Bobiak, 2010). Qualitative research is finding a more central place in the area of organizational studies and social sciences, with current trends suggesting a stronger acceptance of the interpretive nature of qualitative research which allows the researcher to draw on interpretations of the data in pursuit of the answer to research question (Creswell, 2003).

In the first phase, to complete this research, first, three semi-structured interview were conducted with owners and managers of the three different indoor play centers. The resulting data consists of 3 rounds of phenomenological interviews (Thompson, Locander, and Pollio, 1989) with 4 owners and operators of indoor play centers, aggregating to over 13 hours of recorded dialogues. The interviews averaged over one hour in length and were all conducted face to face. We started our inquiry with a broad interest in the decisions and courses of action taken by each indoor play center in response to the COVID-19 pandemic. We started initially with unstructured interviews to explore the general views of interview subjects on the different courses of action taken by their respective businesses and in response to the pandemic. During the first stage of interviews, the decisions and actions by each organization were recorded and classified as related or not related to our focus and used for the second round of interviews.

In the second round, we used a semi-structured approach to focus on exploring the causal links and antecedents of the actions classified as related to digitalization taken by each business, which were identified and classified during the first stage of the interview process. We paid special attention that the semi-structured approach to interviews be designed to serve our theory building approach to our research, which is built on data (Yin, 1984; Eisenhardt, 1989; Brown and Eisenhardt, 1997). Following these steps, we encouraged interview subjects to recount and further elaborate on the decision and actions classified as e-commerce or digitalization from their own perspectives. The data from this stage was recorded and transcribed. Subsequently, the antecedents were classified, coded and clustered and used during the third round of interview with the subjects.

The final round of the first phase of our study included semi-structured interviews with a focus on exploring opinions and reactions of our interview subjects regarding the emerging themes that we arrived at following the first two rounds of the first phase of our study. We queried the reactions and opinions of interview subjects on themes and classifications in order to establish causality. The three-round qualitative approach taken in this research allowed us to develop an enriched perspective of the different stages of digitalization within the indoor play center industry segment and the connection of each stage to the COVID-19 pandemic timeline.

With our approach in the first phase, we were able to move into the second phase of our study and with a more theory-driven approach as we systematically reviewed and analyzed the contents and material available in our sample. During the second phase of our study, we completed an extensive in-depth analysis of over 3000 items including comments, posts and exchanges. During the first round of our systematic review, we screened the content to determine which ones fit within the scope of our study. At the conclusion of the first screen, we retained 1236 items. Through the second round, we used the themes and classifications identified during the first phase of the study to classify the content of the qualitative data. We then proceeded to comb through the data to eliminate redundancies and to accurately assign posts to business owners responsible for each item. Finally, we screened the data to ensure that we did not overlook any classifications that did not emerge during the process of the interviews.

7. Results and Findings

In our study, we focus on e-commerce alternatives that are creatively developed, pursued and implemented in an industry that is an unlikely candidate for such transition. Our findings reveal intricate details in the process that involves redefinition of value proposition, adaptation of procedural elements and processes, and incorporation of customer feedback into the ongoing loop of value readjustment, which are presented in a theoretical model.

7.1.Stages of Digitization in the Indoor Play Center Industry

During the three rounds of exploratory and semi-structured interviews, two distinctive themes emerged. The first theme related to the strategic disposition of business owners as they formulated responses to contextual challenges resulting from COVID-19. After the first round of interviews, we identified the Miles and Snow (1978) classification of strategic actions as the best conceptual fit with the identified theme. The reason that this classification was selection for subsequent rounds was that it primarily focuses on the actions instead of the processes and resources. The second emerging theme related to the timeline of the COVID-19 pandemic. During the first round we identified that the perception of threat and urgency, as well as the appropriateness of decisions made by business owners and operators in our sample. Following the first round of interviews, we used our findings to gain more in-depth understanding of the phenomenon in order to identify the causal links. Due to the focus of this study, we placed our emphasis on strategic actions and decisions in the direction of digitalization and e-commerce.

Our findings from the first phase of this research which included interview results explicated four stages of a process that explains the transition of indoor play centers from a very traditional in-person business model to one that incorporates various aspects of digital technology and e-commerce. We identified the stages as Recognition, Realization, Reconfiguration, and Adaptation. Our systematic analysis of content screened and collected provides us with processes and details related to each stage.

Stage 1: Recognition

In this stage, businesses mostly underwent the process of recognizing changes that had occurred in the environment. Analysis of communications revealed two factors to be main determinants: severity, and expected duration of the pandemic. We followed Miles and Snow’s (1978) classification of strategy-Analyzer, Prospector, Defender, Reactor- and conducted a structured analysis of Stage 1 strategies pursued by business owners.  We identified four distinctive categories of behaviors among business owners depending on their perception of environment based on each of the two dimensions.

Prospectors are those that taken greater risk and aggressively seek out new product in order to get ahead of shifts in their environments. In our sample, prospectors were represented in Stage 1 with comments such as:

“…we expect these restrictions to be severe and extensive. We’ve been looking into adjusting our operations for the foreseeable future. Has anyone successfully transitioned to offering more online services?”

Defenders do not seek aggressive pushbacks and challenges at their markets. They will develop strategic responses that either anticipate contextual calm and low volatility, or will take actions that help market toward that direction. Businesses that fall into this category do not anticipate radical or severe changes to occur in their industry and their actions and operations are focused on maintaining and supporting existing operations. During the COVID-19 early stages, businesses in our sample that fell into this category were associated with efforts primarily focused on increased cleaning in order to maintain status quo:

“…looking at what […] can be done to add to cleaning when we reopen…we are considering Ozone machines and UV light treatments. Does anyone have experience with those?”

The businesses that we identified as Analyzers (Miles and Snow, 1978) were those that pursued partial adoption of ideas by prospectors, but on a later cycle. They also reacted to ideas by Defenders, but did not demonstrate the same full commitment to those directions as Defenders would do. What distinguished Analyzers from both Defenders and Prospectors was that both of those categories interact only with those business owners that are likeminded. This means that those business owners identified as Prospectors showed interest only in adding to the conversation on their own posts, or to interact with other comments and posts that fell into the Prospectors strategy category. Similarly, business owners that fell into the Defender category demonstrated behavior where their interaction was limited to others that fell into the Defender category. In contrast, Analyzers did not post original material, however, they commented on posts by both Defenders and Prospectors, with comments such as:

“(Commenting on a posting): How did you manage to change the routine for cleaning? Our health officials are not giving us any guidance… […] what steps did you take to satisfy their guidelines?”

And

“(Commenting on a posting): What does your volume look like for online events? How does it compare to foot traffic?”

Consistent with the Miles and Snow (1978) categories, we also found a distinctive group of business owners who did not demonstrate any adjustment to business operation, or unwillingly ceased to operate without any clear plan to go forward. For example, one of the business owners made the following statement representative of this distinctive category:

“Everything is so unclear. We have effectively closed our doors and waiting…”

Stage 2: Realization

Stage 2 or Realization refers to the time when business owners gain environmental awareness and have sufficient information to better understand the nature and longevity of challenges that they face. Following the Stage 1, as information became more available and with the increase in reliable sources of knowledge, we observed another pattern of behavior. The spread of COVID-19 did not take place homogeneously across the United States. The states on the eastern and western coasts were affected earlier and more severely. While public elected officials in states that were on a later cycle of infection rates expressed optimism for their regions being less impacted over time, our review of comments and exchanges between business owners in our sample revealed a different tone. With few exceptions, most business owners had accepted the pandemic reaching their regions as an inevitable fact and most of the exchange at this point was focused on making decisions regarding whether or not a path towards adopting a more digital model would fit with the existing capacities of their organizations. We identified three distinctive categories of decisions emerging at Stage 2. The first category was ‘termination’. With treatments or vaccines not in sight at the time.

Stage 3: Reconfiguration

We define Reconfiguration as the stage where business owners actively engage in identification and development of processes to continue their operations within their industry and under imposed circumstances. Following Stage 2, we identified a new trajectory in behaviors, attitudes and strategic actions of businesses in our sample. We observed two very distinctive directions in reconfiguration of operations. First, there was extensive exchange of information between business owners as they discussed their existing products and services and whether they could be successfully offered on digital platforms. Products and services falling into this category did not substantially differ from what was offered during the time before the pandemic. However, digital platforms were used to facilitate business operations and transactions in order to meet the requirements of newly enforced regulations, as well as accommodating adjusted customer preferences. For example:

“We are using online pre-registration for open play. Customers pay online and in advance in order to book their time slots.”

Or

“Waiver forms are now available, only online. It helps with contact tracing, but also with managing customer data.”

Another action that many businesses in the Reconfiguration stage took involved a practice adopted from the travel and leisure industry. To overcome immediate financial difficulties, many of the indoor play center businesses in our sample used their digital platforms for booking open play admissions for future use and at discounted rates.

The second direction observed involved development of new products and services that were previously not part of their service offerings. For example, several of the businesses added merchandizing and online sale of products to their portfolio:

“Our friends in […] are selling these beautiful masks with their own designs! You can order them on Facebook or directly from their website.”

Or

“We have successfully managed our first virtual birthday party! The parents picked up the paper products from our facility and I dressed up as a tiger and managed the event online. Children participated very well!”

Stage 4: Adaptation

The Adaptation stage refers to when the businesses need to revise their identity, staffing practices, cost structure, and operations in order to continue to deliver a successful adjustment to their customers. An observable impact of the pandemic was that many businesses had to make drastic changes to the size of their staff. Those who remained affiliated with the business needed to be retrained in order to be able to access and retrieve information that was collected and stored online, as well as to deliver services such as virtual event hosting which required little to no physical interaction with the customers. Due to the hedonic nature of the indoor play industry, the ability to draw in customers at the same volumes as in the past had significantly diminished. Certain aspects of the traditional business model such as revenues generated from sales of food and drinks had dissipated resulting in a substantial deficit given preexisting cost structures. During Stage 4, businesses in our sample that managed to come across successful new configurations were mostly forced to make significant changes to their cost structures in order stay close to the break-even point.

8. Conclusion

The COVID-19 pandemic caused unanticipated challenges for many different business segments, resulting in an increased pace of transition to online and digital platforms that require less face-to-face and in-person interactions. While some industry segments are naturally better poised for such transition, others with a strong foundation in customers’ hedonic experience have faced additional obstacles. Our findings show that despite these obstacles, actors within such business industry segments have been successful to different degrees in making the much-needed transition, with COVID-19 playing the role of a catalyst. However, the existing models that define and describe the stages of digitalization may not accurately represent the process within such business industry segments.

Our findings suggest that the strategic mindset and disposition of business owners operating in the area of indoor play have an important role in their decision to adopt more digital business models. These dispositions not only explain these varying mindsets for identification of alternatives, but they also influence the perception of contextual developments. Consequently, we find that those businesses in the area of indoor play center industry segment which successfully undertake a transformation to adopting more digital platforms and e-commerce practices, complete four stages in this process. We also find that the degree of success in this process of transformation depends on the ability of business owners to complete each of the four stages in timely manner. Those businesses that remain stagnant at each of the stages failed to fully adapt to their contextual needs and their digitalization process did not result in positive outcomes.

Our findings contribute to the literature in the area of digitalization and e-commerce in three ways. First, our findings propose an addition to the process of digitalization by exploring and identifying four distinctive stages in the process. Most of the past research in the area of digital commerce focus on platforms and business models with high propensity for a digital transformation. Therefore, their proposed processes cannot be generalized to a larger set of businesses and industry segments. Our proposed model addresses this issue by exploring dynamics of a different and more traditional industry segment. Second, by focusing on an industry segment that is founded with strong roots in customers’ hedonic experience, we have shown that theories of digitalization are more applicable to a broader set of industries than previously imagined. Third, we introduce the Miles and Snow (1978) classification of strategic dispositions to better explain the nature of businesses’ responses to contextual challenges.

Our research also contributes to the literature that explores the impact of the COVID-19 pandemic. There is a significant and growing body of literature that focuses on the different dimensions of the impact that the pandemic has had on social and economic aspects of our societies.  More recently, the focus has shifted from exploring merely the negative impacts and their extent and severity, to understanding the role that the pandemic has played as a catalyst for business model transformation, supply chain, and new product development. Here, we take a further step in that direction, as we explore an unlikely candidate.